This is a nest of the tree wasp, Dolichovespula sylvestris. Nests are usually suspended from above; this one was built around the branch of a tree. The entrance into the nest is from below.
How is it made? The queen makes the nest in the spring, from chewed wood pulp mixed with saliva. She will start the nest with a single layer of the chewed wood pulp and salvia mix and work out to the edge of the branch. Beneath this single layer the queen creates a stalk onto which she attaches several cells, she lays eggs in these cells and raises the first few worker wasps herself. Once enough workers have grown the queen will hand over maintenance of the nest and responsibility for feeding the next generation of workers to the other adult wasps. They will add more layers of chewed wood pulp to the nest and also create more cells for the queen to lay eggs into. The nest is an incredible feat of engineering for such tiny creatures and provides the whole wasp colony with everything they need to successfully exist within their environment and ensure the survival of the next generation.